By Sandeep Walunj
Investors often see every investment brand, platform, influencer, and even advisors pushing them to invest and invest quickly. However, there is little discussion on when to exit.
Most experts seem to suggest that selling is unnecessary:
“If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.” – Philip Fisher
On the other hand, practical voices like Zig Ziglar say:
“You may not know when to start but must know when to stop!”
So, where does the truth lie? As always, somewhere in the middle!
Here are key scenarios where exiting an investment may be advisable:
1. Achievement of Goals
- Did you invest with a clear goal—retirement, buying a house, or funding education? If so, exit when the goal nears.
- Shift to less volatile asset classes as the exit date approaches to minimize risks.
2. Profit Booking
If the objective was profit booking, evaluate if further upside exists using frameworks like:
- Price-to-Earnings (P/E) Ratio – If significantly above historical or sector averages, it may indicate overvaluation.
- Price-to-Book (P/B) Ratio – A high ratio may signal overvaluation relative to intrinsic worth.
- Discounted Cash Flow (DCF) Analysis – If the stock price has reached its fair value based on future cash flows, exiting may be prudent.
- Reinvest proceeds wisely and consider tax implications.
- During a market rally, sell in tranches to secure gains while retaining exposure.
3. Stop-Loss Strategy
- A stop-loss order sets a predetermined exit point to limit losses.
- Example: If a stock is bought at ₹100 with a 10% stop-loss, sell it at ₹90, preventing larger losses.
- Set stop-loss levels based on investment type—example 5-15% for volatile stocks, 15-25% for stable blue-chip stocks—aligned with your risk tolerance.
4. Underperformance
Exit an investment if it consistently underperforms, despite a reasonable recovery period:
- Mutual Funds – If it lags behind category peers and benchmarks persistently.
- Stocks – Red flags include:
- Declining revenues and profits.
- Rising debt levels.
- Loss of market leadership.
- Governance issues (e.g., fraud, regulatory troubles).
5. Portfolio Rebalancing
- A well-diversified portfolio needs periodic rebalancing.
- If an asset class grows disproportionately large, reduce exposure and reinvest in underweighted assets.
- Example: If equities surge, selling some stocks and reallocating to bonds can maintain balance.
6. Market and Economic Conditions
Macroeconomic shifts can impact investment viability. Consider reducing exposure in cases of:
- Rising Interest Rates – Sectors like real estate and capital-intensive industries may underperform in this scenario.
- Recession Indicators – An inverted yield curve or declining consumer spending may warrant exiting cyclical stocks.
- Regulatory Changes – New laws, tax policies, or sectoral regulations can impact profitability.
Behavioural Biases That Delay Exit Decisions
Many investors hold on to poor investments due to psychological biases:
- Loss Aversion – Refusing to sell at a loss, hoping for recovery instead of reallocating capital.
- Confirmation Bias – Ignoring negative signals and focusing only on positive news.
- Anchoring Bias – Fixating on past high prices and resisting selling below that level.
As you can see, exiting an investment is as important as entering one. Reviewing your portfolio periodically and making objective decisions can improve long-term returns. If you struggle with investment exits, consult a financial expert.
(The author is Group CMO of Motilal Oswal Financial Services Limited. Recommendations and views by experts are their own. These opinions do not represent the views of The Times of India)
